Lend More or Be Taxed, UK Banks Told

The UK’s business secretary Vince Cable has warned Britain’s banks they could face new taxes if they fail to meet lending targets for small businesses under the government Project Merlin agreement.

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Britain's Prime Minister David Cameron (front 2nd Left) calls an end to a group picture with his new cabinet ministers in the garden of Number 10 Downing Street in London, England.

Cable echoed similar comments made by the Prime Minister David Cameron earlier in the week when he said he would consider it a “personal betrayal” if the banking sector failed to meet the targets it had agreed with the government at the end of last year.

Earlier this week figures showed Britain’s banks lent 16.8 billion pounds ($27.2 billion) to small and medium sized enterprises (SME) in the first quarter of 2011 - 2.2 billion pounds short of the agreed target.

In return for lending up to 190 billion pounds to SMEs this year the government has agreed not to impose any further tax on profits or bank bonuses. However, on hearing the banks had failed to meet their first quarter target figure, Cameron said the banks had to “meet their side of the agreement or we don’t have to meet ours.”

The business secretary, in Birmingham to launch a new 2.5 billion pounds equity fund designed to help stimulate additional bank lending to SMEs, said: “There clearly is a problem, particularly for SMEs who can’t go to capital markets. But I don’t want to say Merlin is a failure. It is one of a series of initiatives that will help raise confidence.”

However, he added that the threat to tax the banks remained real, telling the Financial Times: “That’s what the prime minister has said and that’s what I’ve said. But it is too early for threats and retaliation.”

The warning from the business secretary came on the same day the chief executive of the Financial Services Authority (FSA), Hector Santes warned the banking sector the regulator’s replacement, the Prudential Regulatory Authority (PRA) - which he will head when it takes over from the FSA in 2012 – would be more intensive and more intrusive than its predecessor.

Santes said: "The new regulatory model will be based on forward-looking judgments and will be underpinned by the fact that the PRA has a single objective to promote the stability of the UK financial system and in consequence will be a very focused organization. The new supervisory approach will build on the more intensive approach adopted by the FSA since the crisis."

The government’s new business growth fund will invest in SMEs with between 2 million and 10 million pounds in turnover in return for a minimum 10 percent equity stake and a seat on the board.

It said the fund would provide long-term equity investment for two growing companies which did not have access to this source of capital.

Several banks are working with the government on the fund including Barclays, HSBC, Lloyds, Royal Bank of Scotland, and Standard Chartered as well as the British Banker’s Association.